Chapter 7
Revenue and Collection Cycle
Accounting 408
Chapter 7
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Accounting 408
Chapter 7
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1. Internal Control (cont’)
Accounting 408
Chapter 7
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1. Internal Control
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Internal control over sales
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separate functions: receiving customer order,
credit approval, filling and shipping sales order,
billing customers, recording the sales
documents and records: customer order, sales
order, shipping documents, sales invoice,
approved customer list, authorized price list, sales
journal, A/R subsidiary ledger, A/R general ledger
account
Accounting 408
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1. Internal Control (cont’)
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Internal control over cash receipts
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general rules for handling cash
separate functions: receiving cash, depositing
cash, recording the transactions
controls over cash sales, payments received
through the mail
documents and records: remittance advice, cash
receipts list, daily cash summary, deposit slip
Accounting 408
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1. Internal Control (cont’)
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Internal control over sales adjustments
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type of sales adjustments
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cash discounts
sales returns and allowances
writing off uncollectible accounts
separate functions: cash handling, cash
recording, sales adjustments
documents and records: credit memos, write-off
authorization memo
Accounting 408
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10. Financial Statement
Assertions (Con’t)
Account Balances
Existence *
Transactions
Occurrence *
Rights and obligations *
Completeness *
Disclosures
Occurrence
Rights and obligations
Completeness
Valuation and allocation * Accuracy
Completeness
Valuation and allocation
Accuracy
Cutoff
Classification
Classification*
Understandability *
* PCAOB Assertions
ACCT-4080
Chapter 1
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1. Internal Control (cont’)
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Sales transactions audit objectives
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Recorded sales transactions actually occurred
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Existing sales transactions are recorded
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Sales transactions are recorded accurately
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Sales transactions are classified correctly
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Sales transactions are recorded on correct dates
Accounting 408
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Accounting 408
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2. Substantive Tests
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Accounts receivable balance objectives
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recorded A/R exist
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client has rights to A/R
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existing A/R are included
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A/R is stated at realizable value
Accounting 408
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2. Substantive Tests
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Accounts Receivable
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Confirmations
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requirements
controlling process
requests not to confirm
types - positive, negative, others
balances, transactions
effectiveness
returned mail
improving response rates
disclaimers and other restrictions in confirmation responses
Examination of subsequent cash collections
Inquiry of sales or factoring of A/R (evaluate client’s rights to A/R)
Vouching and tracing transactions
Cutoff tests - sales and cash
Analytical procedures (often use SAP for revenue accounts) (examples)
Evaluate adequacy of allow. for uncollectibles
Search for related party receivables
Accounting 408
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Positive
Confirmation
Accounting 408
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2. Substantive Tests
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Accounts Receivable
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Existence and Occurrence
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Rights and Obligations
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confirmation, vouching, cut-off tests
vouching, confirmation, determine if factored or assigned
Completeness
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Accounting 408
analytical procedures, tracing, cut-off tests, confirmation
Chapter 7
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2. Substantive Tests
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Accounts Receivable
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Valuation
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evaluate adequacy of allowance, subsequent cash
collections, vouch recorded receivables
Presentation and Disclosure
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Accounting 408
compare statement presentation to GAAP
related party transactions, pledged, assigned, or
factored receivables
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3. Fraudulent Revenue Recognition Schemes
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Obvious accounting violations
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Fictitious sales or fake customers
Premature recording of sales
Inflated sales
Accounting 408
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3. Fraudulent Revenue Recognition Schemes
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Earnings management - At what point
does managing earnings become fraud?
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Pushing the limits of accounting standards
Changing accounting policies and estimates
midstream with positive impact
Exploitation of accounting methods to distort
actual performance of organization
Accounting 408
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3. Fraudulent Revenue Recognition Schemes
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Transactions lacking integrity
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Quality of earnings issues
The following often have an element of
collusion
 Roundtrip transactions
 Channel stuffing
 Bill and hold transactions
 Related party transactions
Accounting 408
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3. Fraudulent Revenue Recognition Schemes
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Non-top line income sources methods
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Investments and related income
Sales of investments or fixed assets
Factoring receivables
Sale of obsolete inventory
Any other asset sales representing
unsustainable revenue sources
Accounting 408
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3. Fraudulent Revenue Recognition Schemes
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Cover up methods
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Backdating invoices, agreements
Manipulation of dates shipped on docs
Customer statements – hold, destroy, alter
Falsify customer confirmations
Delay recording credit memos
Ship goods to third party warehouse
Lapping receivable transactions
Accounting 408
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3. Fraudulent Revenue Recognition Schemes
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Detection methods
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Vouch supporting documents
Review cutoff of large sales near YE
Perform analytical tests
Review transactions after YE (returns,
cancelled orders)
Determine methods and consistency of
reserves, contras
Accounting 408
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3. Fraudulent Revenue Recognition Schemes
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Detection methods
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Confirm customers
Review shipments to warehouses
Examine shipping document signatures
Compare ship dates to customer order and
requested delivery date
Review customer complaints
Accounting 408
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Review Questions for Discussion
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Chapter 7
7.2
7.3
7.5
7.8
7.16
7.17
ACCT-4080
7.18
7.19
7.20
7.21
7.22
Chapter 1
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